Coronavirus disease (COVID-19): Impact on commercial contracts
The outbreak of the Coronavirus disease (COVID-19) and the consequences for the economy and, by extension, the execution of commercial contracts, are significant.
When it comes to commercial contracts, an important question is whether the consequences of the coronavirus can qualify as force majeure or an “act of God”; in which case a party can rely on this exception in a supplier-customer relationship.
Force majeure, “hardship” and Belgian law
The first legal question is: which law applies to the contractual relationship – Belgian or Foreign or United Nations Convention on Contracts for the International Sale of Goods (CISG) or other?
The answer depends, amongst others, on the subject matter, a possible choice of law clause as well as different rules related to international conflict of laws.
Under Belgian law, force majeure means the absolute or practical impossibility of executing a contract outside of the parties’ control or fault. This comes down to a factual and case-by-case assessment and interpretation.
In general, force majeure is an exceptional circumstance. A contracting party should ensure – to the fullest extent possible – the correct and timely execution of its contractual obligation at all times. This entails a close examination of the facts at hand, weighing the options, searching for other suppliers of (alternative) products and in any case gathering sufficient supporting evidence.
In case the impossibility of execution is closely connected to a government-imposed measure such as a quarantine or customs measure, the qualification of force majeure is more easily accepted.
Force majeure clauses
Force majeure clauses are often included and defined in commercial contracts (and/or general terms and conditions). In such cases the extent and effect depends on the exact wording of the clause and the relevant facts mentioned in the contract. Many force majeure clauses expressly mention: epidemics, a shortage of transport means, government-imposed measures or even the circumstance where the supplier’s supplier is unable to supply.
Sometimes contracts also include a so-called “hardship” clause. This usually applies to a case in which there is an unreasonable imbalance in the respective contractual obligations of the parties due to abnormal or exceptional circumstances. This could indeed be relevant given the already existing government-imposed measures regarding COVID-19, and those still to come.
If a “hardship” clause is not expressly foreseen in a contract, a party generally cannot rely on the “hardship” exception and the contract remains fully applicable (although a party cannot abuse its rights).
As soon as there is a force majeure (or “hardship”) circumstance, a contracting party should put the other party on notice in a timely manner so that the latter may in turn be able to limit the resulting damages. In many contracts such a procedure is foreseen and should be closely followed.
The contracting party receiving such a notice should verify whether all procedures were followed and should make sure not to waive any rights or claims in case certain concessions are made.
Temporary force majeure
In the event of a temporary force majeure event, the debtor is temporarily released from the execution of its obligations without incurring any liability for the damages. The supplier’s obligation to supply is suspended until the force majeure event disappears and the execution becomes possible again. In the meantime, no liability is incurred.
Also in the meantime, a renegotiation of the contractual terms is of course always possible.
The suspension of the execution of the contract, without any liability incurred, is only possible in the event of a temporary and absolute impossibility to perform its obligations, outside of the parties’ control.
However, even if a contracting party does not perform its (prior) obligations in an incorrect manner, the other party may also suspend the performance of its obligations – in principle – without incurring any liability.
Permanent force majeure
In the event of a permanent force majeure event, the debtor is also permanently released from its obligation, in which case the creditor shall have to bear any financial loss incurred (i.e. no refund can be asked and each party bears its own risk).
If the non-delivery (or late delivery) is not a result of force majeure, the non-delivery or substantial delay in delivery can be interpreted as a breach of contract. In this case, the contract – given a substantial breach and, in principle, after prior notice of default – can be terminated after which each party has to be placed in the same position it would have been in if no contract was signed. This means that no request for a refund is possible.
There is also a liability for all damages incurred by late or incorrect performance of obligations, unless for instance indirect or consequential damages are contractually excluded.
It is of the utmost importance to consult the specific and/or general terms and conditions of a contract prior to its termination.
Some contracts stipulate that termination is only possible after a certain timeframe (e.g. 90 or 180 days), which can lead to legal uncertainty. In the meantime, however, the execution of the contract is usually suspended.
Some force majeure clauses expressly include an obligation to renegotiate contractual terms.
When concluding new contracts or accepting new orders, a party should also ensure that effective (possibly modified) contractual terms and conditions apply, e.g. force majeure/ “hardship” clauses, limitations of liability such as exclusion of indirect and consequential damages, non-binding delivery terms, etc.
A company director should always act “normally and diligently” and ensure sufficient (crisis) management during this COVID-19 outbreak.
Here are some general guidelines: collect information, prioritize and put in place a crisis management team, limit damages, act diligently (towards your stakeholders and personnel), communicate transparently and search for external advice where necessary.
In general, we recommend:
- explore the content of the contract (framework and/or individual agreement, GTC) focusing on force majeure/hardship clauses;
- identify the applicable law (Belgian, foreign, CISG, etc.);
- check the (contractual) notification obligations;
- document the current situation and any measures taken (collecting evidence);
- analyze the (operational) liability risks;
- find alternative supply routes, if necessary;
- communicate proactively and negotiate pragmatic solutions in order to minimize damages and sustain the supplier-customer relationship.
If you have any questions, please reach out to us.